President's Budget Follow-Up

Following up on our press release about the President's Fiscal Year 2011 budget proposal, here are a few more thoughts:

Annual discretionary spending:

A major element of the Obama administration’s 2015 deficit reduction goal is a three-year freeze on non-security discretionary spending (FY 2011-2013). While the portion of the budget covered by the freeze is less than 20 percent, it would still save an estimated $29 billion in 2015 alone, and $249 billion over 10 years.

Clearly, more must be done and even doing this will prove difficult. Nevertheless, The Concord Coalition supports the proposed freeze and, given current economic circumstances, agrees that it is appropriate to begin implementation in 2011. Concord also agrees that the freeze should not be across-the-board. Some programs may merit an increase while others can be cut. An aggregate freeze, as proposed, would help to set priorities and reduce waste.

War costs in the budget are likely underestimated. In keeping with last year’s budget, the administration has included annual placeholder sums of $50 billion for war costs beyond 2012. While it is impossible to say what future costs will be -- and the placeholder amount is more realistic than the prior administration’s practice of including no additional war costs -- it seems likely that these costs will be higher. For example, the CBO’s alternative path for war spending from 2012 to 2020 assumes $123 billion in costs above OMB's total.

The exemption of defense spending from the discretionary freeze is understandable given national security challenges. However, as the administration acknowledges, this does not mean the defense department should be exempt from scrutiny for waste and outdated programs. One option for Congress to help enact needed waste reduction would be for it to consider extending the spending freeze to non war-related activities -- forcing members to live within an easily acknowledged budgetary restraint when considering which programs to save.

Revenues:

Revenues grow from 14.8 percent of GDP in 2010 (the lowest since 1950) to 18.9 percent of GDP by 2015 and 19.6 percent by 2020. Most of that growth reflects a return to normal economic conditions. And, although the budget does propose tax increases, revenues over the 10-year period are still $1.5 trillion lower than they would be under current law.

Even though the 2020 revenue level of 19.6 percent of GDP is above the 40-year historical average, revenues would still be below levels during the budget surplus years in the late 1990s.

Mandatory (entitlement) spending:

The projected sources of growth in mandatory spending, and its rate of growth, demonstrate the two major cost drivers of future federal spending: an aging population and health care costs. Social Security will grow by 4 percent over the next ten years. Medicare outlays will increase by 33 percent over the same period. This highlights the importance of reigning in health care costs (see below).

Health Care Reform

The President’s budget assumes savings that would occur with passage of a comprehensive health care reform plan. However, still uncertain is the commitment of the President and Congress to enacting comprehensive reform. Since health care costs are a driving force behind the long-term budget challenge, reform is crucial to long-term sustainability. Furthermore, attacking health care cost inflation is not something likely to be done in stripped-down half-measures. Comprehensive reform should contain serious cost control measures such as the Senate bill’s excise tax and Independent Payment Advisory Board.

Budget Process Reform

In addition to support for statutory PAYGO and a fiscal commission, the President’s budget also proposes enhancing the President's rescission authority to cancel previously appropriated funds by requiring they receive an up or down vote in Congress. In the past, most presidential rescission messages have died without a floor vote. This authority could help reduce government waste and build public confidence in the federal budget process.

While much attention will be paid to the President’s fiscal commission being essential to achieving the medium-term goal of getting deficits to sustainable levels, our concern is that undue focus on this goal could eclipse the more important need for the commission to attack longer-term fiscal issues that have not been dealt with through the regular budget process.